Outlook: boom times set to continue

The Western Australian economy has gone through an exceptional phase of economic growth and development over the past four years, and has gained further momentum so far in 2006.

By mid-2006, the domestic economy had expanded at a “China-like” pace of 14 per cent - new capital expenditure was up by 83 per cent, retail trade was up by 10 per cent, housing approvals were up by 31 per cent, house prices by 35 per cent, and unemployment was down to 3.6 per cent.

Such an impressive growth profile will be difficult to sustain, but it is foreseeable that above average growth in the WA economy can be achieved over the longer term as the economy becomes more diversified.

In the resources sector, the prospects no longer hinge on the levels of demand for a single commodity, such as iron ore, with a greater number of resource companies producing a wider variety of commodities.

Other sectors of the economy have also grown strongly. The construction industry has been crucial in helping to build up the state’s productive base through the construction of new resource projects and other important economic infrastructure.

The service industry as a whole is the largest sector in the economy by output and employment. And contrary to popular opinion, WA also has a strong and growing manufacturing industry, particularly in relation to downstream processing industries, which are built upon the state’s competitive advantages, and other niche manufacturing industries such as shipbuilding.

By and large, the strength of the WA economy has been underpinned by a dominant resources sector that is both highly capital-intensive and export-focussed.

Conditions have probably never been better for the resource sector, which has benefited from strong global demand and soaring commodity prices.

Such is the strength of demand that the state’s producers have been unable to keep up, resulting in the emergence of capacity constraints which have limited the extent to which exports have grown.

This in turn has generated a wave of investment activity, which has been one of the principal drivers behind WA’s exceptional growth record. Since 2001-02, business investment in WA has grown on average by 22 per cent per year, with investment in the resources sector a primary driver behind such high levels of growth.

The spin-off effects of such activity have been significant. As businesses have expanded, new employment opportunities have emerged, with over 110,000 new jobs created over the past three years.

This in turn has sparked higher levels of consumer spending, while investment in the housing market has also been very strong.

Consumer spending has grown on average by almost 5 per cent over the four years to 2005-06, while the housing sector has defied the national downturn, growing on average by 5.5 per cent.

A by-product of these exceptional times has been the emergence of critical labour shortages and the associated wage pressures.

Together, these issues represent the number one issue of concern to business, according to the CCI-BankWest Survey of Business Expectations.

Other cost pressures have also emerged as a result of higher prices for key inputs into the production process, such as fuel and steel, while higher property prices have also increased the costs of doing business.

Despite these constraints, it is expected that the WA economy will continue to grow strongly over the coming years. CCI’s latest economic forecasts predict the WA economy will expand by around 6 per cent this financial year, and a further 5 per cent in 2007-08.

It is expected that the drivers of growth in WA will change over the coming years, as the significant amount of investment that has been undertaken in the WA economy pays dividends through higher export returns.

While the domestic economy is not expected to continue to grow at its current pace going forward, it is unlikely that activity will slow by any great extent given the high levels of consumer and business confidence.

The risk of a global economic slowdown would appear to be the only thing that could put the brakes on the WA economy.

While there are concerns, ranging from China’s financial system to the possibility of a consumer-led slowdown in the US economy, at this stage they do not appear to be a material risk.

• John Nicolaou is chief economist at the Chamber of Commerce and Industry of WA.